FINANCE FAMILY: ETF - Exchange Traded Funds

ETF are Exchange Traded Funds which trades in stock exchanges like a companies stocks. ETFs are managed by Asset Management company (AMC) like a mutual funds.

ETFs can be buy and sell in stock exchanges through a broker. Value or net asset value(NAV) changes of an ETF changes as per the trades in the markets. Units of an ETFs are only listed on stock market so they cannot be buy and sell through AMC companies. Like a normal stock sell first time its shares in stock market through IPO, AMC lists its ETf same as stock. Anyone can apply in it like a IPO.

ETFs generally track the specific Index like Nifty, Bank Nifty, Nifty IT, etc. When any Investor buys an ETF he actually buys the specific Index and a fluctuation in that index fluctuates the ETF in same proportion.

ETFs do not try to beat or outperform the markets. The try to give the almost same percentage of returns as the Index generates. This is a main reason that ETFs have less expense ratio than mutual funds. Passively managed mutual funds have low expense ratio than actively managed.

Mutual funds try to beat the markets or Indexes but the less liquidity and more expenses are the disadvantages of it. Opposite of this ETFs have high liquidity and low expenses.

ADVANTAGES OF ETFs

👉 ETFs are considered to be the safer or low risk investment option as compared to specific stocks or securities.

👉 ETFs can be the low cost asset to diversify the portfolio with companies, sector, Index, etc.

👉 ETFs don't need to be managed wisely if it tracks to the large Index in a country, but it needs to be enter and exit timely

👉 The Index shuffling by the management of stock exchange is the part of process in forming the Index. This effects the ETF positively. Low returns or any kind of problematic stocks may decrease the weitage or replace by good one.

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MUTUAL FUNDS v/s ETF